The new European Long-Term Investment Funds Regulation (ELTIF 2.0) has created opportunities to invest in private assets through open-ended funds. Stephane Blanchoz discusses this innovative regulation and the additional investment opportunities it brings.
Democratising investing in private assets
ELTIF 2.0, which came into force in the EU on 10 January 2024, provides new possibilities to create and distribute certain open-ended funds, in particular evergreen funds accessible to non-professional investors.
The regulation includes amendments designed to facilitate access to private assets:
- The mandatory investment advice to be obtained prior to investing in an ELTIF has been abolished
- The 10% cap on the exposure of portfolios smaller than EUR 500,000 to ELTIFs has been removed, as well as the minimum investment requirement of EUR 10,000
- The level of permitted leverage has been increased to 50%
- Simplifying distribution in Europe by removing the requirement for local approval of cross-border marketing.
ELTIF 2.0 significantly broadens the range of investments available to investors, in particular in private credit.
Introducing private credit
Private credit refers to debt financing provided directly to companies by either non-bank financial institutions or private lenders. This type of credit is extended outside of traditional banking channels and typically targets borrowers who may not meet the criteria for traditional bank loans, who are not sufficiently large to issue bonds, or may require customised financing solutions.
In addition to private corporate credit, the private debt market includes real asset debt, such as infrastructure debt and real estate debt, issued by non-bank institutions.
The investment case for private credit
We believe there is a strong investment case for private credit in a world where investors are seeking new sources of returns and diversification from traditional strategies:
- Higher gross yield: private credit can offer a higher gross yield compared to high-yield bonds of the same rating, supported by the yield premium private credit offers
- Lower credit loss: private credit investments include structural features (e.g., covenants) that can provide more downside protection and higher recovery rates than traditional unsecured bonds of the same rating
- Lower volatility: private credit has less price volatility than high-yield bonds, potentially providing more stable returns over the longer term
- Diversification: private credit is less correlated with traditional asset classes such as equity and bonds. It provides diversification by reducing volatility and increasing returns in a traditional portfolio.
Private credit risks
Investing in private credit on a diversified basis can give investors the opportunity to gain a regular and meaningful income. However, we believe manager selection remains a critical consideration given the potential risks.
Investors should be aware that investing in private credit means investing in a specialised or restricted sector. This may involve higher-than-average market volatility and reduced market liquidity. There may be less information on private credit available than would be the case for publicly listed corporate bonds. Private credit may be more sensitive to changes in market conditions.
Some private credit sectors offer less security than the majority of international developed public markets. For this reason, services for portfolio transactions, liquidation, and conservation on behalf of funds invested in private credit markets may carry greater risk.
Subsequently, managers must remain disciplined in deploying capital, balancing growing competition and smaller potential yield premiums with the need to account for downside risks.
Key takeaways for investors
In our view, ELTIF 2.0 is a major step forward towards the democratisation of private asset investing for both professional and non-professional investors.
By adding private credit strategies to their portfolios in place of traditional equity or credit strategies, investors may be able to increase risk-adjusted returns using private credit. However, private credit investments involve several risks, making manager selection critical.
For a more in-depth analysis of this topic read our whitepaper ‘Investing in private credit through open-ended funds’.
